The sales department tells management that they can increase revenue by 20 percent by increasing sales 20 percent, but the production department says that to achieve that number of units, they will have to buy a new piece of equipment that will add $200,000 to the appropriate category. What happens when we enter those changes into our model? (Enter a new number in Enter Units that reflects a 20 percent increase in chairs sold. Increase Manufacturing Machinery to allow for the new purchase.) Clearly, a 20 percent increase in sales will increase revenue 20 percent, but what happens to profits?

Question

The sales department tells management that they can increase revenue by 20 percent by increasing sales 20 percent, but the production department says that to achieve that number of units, they will have to buy a new piece of equipment that will add $200,000 to the appropriate category. What happens when we enter those changes into our model? (Enter a new number in Enter Units that reflects a 20 percent increase in chairs sold. Increase Manufacturing Machinery to allow for the new purchase.) Clearly, a 20 percent increase in sales will increase revenue 20 percent, but what happens to profits?

Answer 1

To determine the impact on profits, we need to consider the increase in revenue from the sales department and the additional cost of purchasing the new equipment from the production department.

Here's how you can calculate and analyze the effects on profits:

1. Calculate the 20 percent increase in sales:
- If the original number of chairs sold is N, a 20 percent increase would be 1.2N.
- Enter this new number, 1.2N, in the "Enter Units" field of your model.

2. Determine the impact on revenue:
- If the original revenue is R, a 20 percent increase would be 1.2R.
- Based on the information provided, the sales department claims that revenue will increase by 20 percent.
- Enter this new revenue value, 1.2R, in the appropriate category of your model.

3. Consider the cost of purchasing the new equipment:
- The production department states that a new piece of equipment costing $200,000 is necessary to achieve the 20 percent increase in units.
- Increase the "Manufacturing Machinery" category in your model by $200,000 to account for this additional cost.

4. Calculate the impact on profitability:
- Profit can be calculated as revenue minus cost.
- Determine the original profit, P, in your model.
- After incorporating the changes, the new profit can be calculated as (1.2R - $200,000) - cost.

Note: Ensure that you account for all costs, including but not limited to manufacturing costs, operating costs, and any other overhead expenses that may affect profitability.

By following these steps and updating your model accordingly, you will be able to determine the impact on profits resulting from the changes in sales and new equipment purchase.